Bernanke-Haters at the Sohn Conference

Druckenmiller noted everyone is saying, "love the market long term, looking for a correction." He believes the opposite, loves market short-term, but hates it long term. Strongly disagrees with quantitative easing by Bernanke now. Only agreed with the first QE. "His bond buying is controlling the most important price in the US economy." Says it will end badly, despite money-printing being beneficial to financial assets currently. When Fed slightly tightens, that will hurt things he says. Bernanke completely ignored strong economic data in January and February, but with slightly soft data later, he printed even more money. Expects a "melt-up" in the short-term, due to Fed's current policy…. Bernanke is “running the most inappropriate monetary policy in history.”

"The majority of what we do at our firm is event driven - the 'macro' is the event right now."… Now he wants to talk Japan. His firm has developed an index to test the acuity of the situation - puts up a slide showing 10 Japanese finance ministers in the last five years, five in the last three years, crowd laughs. "Japan starts with the answer as far as what they want to do, then backfills to get there, like China's economy does." (His "index" slide is here) "You have to be shitting me," Bass says about Japanese bond issuance, "they're adding a ponzi scheme to a ponzi scheme." Japan is on tilt, completely insolvent and their policy is now more than twice as aggressive as ours 70% of the amounts that the Fed is using in an economy that is a third of the size). He points to some anecdotal evidence where counterparties with Japanese debt issuers are starting to rethink their forward assumptions. He says as these episodes start piling up. "This is the end of the beginning."

"Central Banks have reveled in their role, flooding the market with money, they think printing money is 'free' and they don't see the cost- since there is no inflation." We have modest growth, and build-up of risk. "The world needs growth; from innovation." Quantitative easing has caused a distorted recovery. People owning bonds, stocks, is doing fine. Ordinary citizens are not feeling the effective equivalent of Dow 15,000. Causing class warfare. His idea: Those who own long-term bonds of US Governments or others, own things that are not priced correctly. There is no safe haven in these markets. There is no such thing.

[T]he financial system (including the institutions themselves, products traded, and risks taken) has “gotten away from” the Fed’s ability to comprehend. The Fed is primarily responsible for that state of affairs, and it is out of its depth. Former Chairman Greenspan created – and reveled in – a cult of personality centered on himself, and in the process created a tremendous and growing moral hazard. By successive bailouts and purporting to understand (to a higher and higher level of expressed confidence) a quickly changing financial system of growing complexity and leverage, he cultivated an ever-increasing (but unjustified) faith in the Fed’s apparent ability to fine-tune the American (and, by extension, the world’s) economy. Ironically, this development was occurring at the very time that financial innovations and leverage were making the system more brittle and less safe…. Under Chairman Bernanke, the combination of ZIRP and QE completed the passage of the Fed from sober protector of a fiat currency to ineffective collection of frantically-flailing, over-educated, posturing bureaucrats engaged in ever more-astounding experiments in monetary extremism.

If you look at the history of Fed policy from Greenspan to Bernanke, you see two broad and destructive paths quite clearly… the cult of central banking, in which the central bank gradually acquired the mantle of all-knowing guru and maestro… arrogance, carelessness and a rigid and narrow orthodoxy substituting for an open-minded quest to understand exactly what the modern financial system actually is and how it really works. The second path is one of lower and lower discipline…. Monetary debasement in its chronic form erodes people’s savings. In its acute and later stages, it can destroy the social cohesion of a society as wealth is stolen and/or created not by ideas, effort and leadership, but rather by the wild swings of asset prices engendered by the loss of any anchor to enduring value…. Speculators win, savers are destroyed, and the ties that bind either fray or rip. We see no signs that our leaders possess the understanding, courage or discipline to avoid this.

It is true that the CEOs of the world’s major financial institutions lost their bearings and were mostly oblivious to their own risks in the years leading up to the crash. However, as the 2007 minutes make clear, the Fed was clueless about how vulnerable, interconnected and subject to contagion the system was. It is not the case that the Fed completely ignored risk; indeed, several Fed folks made “fig leaf” statements about the risks of the mortgage securitization markets, as well as other indications that they appreciated the possibility of multiple outcomes. But nobody at the Fed understood the big picture or had the courage to shift into emergency mode and make hard decisions…. Ultimately, of course, as the system was collapsing and on the verge of freezing up completely, the Fed shifted into the (more comfortable and much less difficult) role of emergency provider of liquidity and guarantees….

QE is a very high-risk policy, seemingly devoid of immediate negative consequences but ripe with real chances of causing severe inflation, sharp drops in stock and bond prices, the collapse of financial institutions and/or abrupt changes in currency rates and economic conditions at some point in the unpredictable future. However, the lack of large increases in consumer price inflation so far, plus the demonstrable “benefits” of rising stock and bond markets, have reinforced the merits of money-printing, which is now in full swing across the world. In the absence of meaningful reforms to tax, labor, regulatory, trade, educational and other policies that could generate sustainable growth, “money-printing growth” is unsound. We believe that the global central bankers, led by the Fed as “thought leader,” have no idea how much pain the world’s economy may endure when they begin the still-undetermined and never-before attempted process of ending this gigantic experimental policy. If they follow the paths of the worst central banks in history, they will adopt the “tiger by the tail” approach (keep printing even as inflation accelerates) and ultimately destroy the value of money and savings while uprooting the basic stability of their societies….

Printing money by the trillions of dollars has had the predictable effect of raising the prices of stocks and bonds and thus reducing the cost of servicing government debt…. But it is like an addictive drug, and we have a hard time imagining the slowing or stopping of QE without large adverse impacts on the prices of stocks and bonds and the performance of the economy….

At some stage, central banks inevitably realize, regardless of whether they admit the catastrophic nature of their own failings, that the cessation of money-printing will cause an instant depression. Even though at that point the cessation of money-printing may be the only action capable of saving society, that becomes a secondary consideration compared to the desire to avoid immediate pain and blame. The world’s central banks are in very deep with QE at present, and the risks continue to build with every new purchase of stocks and bonds with newly-printed money….

There are many current theories as to why the price of gold had been drifting down and then collapsed in mid-April. We are trying to sort out various possible explanations, but we urge investors to be cautious in their thinking about what circumstances would likely cause gold to rise or fall sharply. The correlations with other assets in various scenarios (risk on or off, economic normalization, inflation, the rise and fall of interest rates, euro collapse) may shift abruptly as the macro picture evolves. Many people think that if stock markets continue rising, and/or if the U.S. and Europe restore normal levels of growth and employment, then the rationale for owning gold is weakened or destroyed. This perception may be correct, and it is certainly a topic that is currently much discussed, but ultimately another set of considerations is likely to dominate.

The world is on a seemingly one-way trip to monetary debasement as the catchall economic policy, and there is only one store of value and medium of exchange that has stood the test of time as “real money”: gold. We expect this dynamic to assert itself in a large way at some point. In the meantime, it is quite frustrating to watch the price of gold fall as the conditions that should cause it to appreciate seem more and more prevalent. Gold may not exactly be a “safe haven” in the sense of an asset whose value is precisely known and stable. But it surely is an asset that, in a particular set of circumstances, becomes a unique and irreplaceable “must-have.” In those circumstances (loss of confidence in governments and paper money), there are no substitutes, and the price of gold may reflect that characteristic at some point.

And Matthew Yglesias:

Hedge fund Bernanke hate: A lot of folks have remarked on the amazing outpouring of hatred for Ben Bernanke's allegedly inflationary monetary policies from the hedge fund set at the recent Sohn Conference, but I don't think anyone's really nailed it. Here's the thing about rich hedge fund guys. They're people. And like other people you may have met, they like money and don't like paying taxes. Where rich people are different is that they have a lot of money, so it's really tempting to say "hey lets take that money and give it to people who need the money more."

Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.

And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background.

Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.

Matthew O’Brien follows up on the hedge-fund-guys-who-hate Bernanke question, and points out that hedge funds have actually done quite badly for a decade, and especially since the crisis began. He also suggests that what the hedgies really hate isn’t Bernanke so much as the IS-LM framework he (and I) basically work in, and hate it all the more because it has worked so well.

This makes a lot of sense. It’s also worth noting that the named Bernanke-haters — Druckenmiller, Singer — are “bond bubble” guys who we can guess, though without knowing for sure, have spent years shorting Treasuries; and what they have found out is that it’s the equivalent of the “widow maker” trade in Japanese bonds. In fact, some of them may have been making the widow maker trade in Japan too.

So these may well be guys who were absolutely sure that their fiscal-doom investments were going to pay off big, and ended up losing money instead. They could respond to this setback by rethinking, considering the possibility that the academic macro types at the Fed and elsewhere actually had a point. Instead, however, they’re yelling that it’s a rigged market, and that the Fed is destroying Western civilization.

Comments

Druckenmiller noted everyone is saying, "love the market long term, looking for a correction." He believes the opposite, loves market short-term, but hates it long term. Strongly disagrees with quantitative easing by Bernanke now. Only agreed with the first QE. "His bond buying is controlling the most important price in the US economy." Says it will end badly, despite money-printing being beneficial to financial assets currently. When Fed slightly tightens, that will hurt things he says. Bernanke completely ignored strong economic data in January and February, but with slightly soft data later, he printed even more money. Expects a "melt-up" in the short-term, due to Fed's current policy…. Bernanke is “running the most inappropriate monetary policy in history.”